Congress and the Obama Administration have acted to allow employers with fewer than 50 full-time employees to reimburse their workers for individual health plans that they purchase on their own.
The law, which takes effect Jan. 1, reverses an onerous IRS provision that imposes a maximum $36,500 fine on small employers that are found to have reimbursed an employee for health coverage that they purchased on the open market or a government-run health insurance exchange.
The fine still stands for applicable large employers, as defined by the Affordable Care Act, and only applies to small employers who are not required to purchase coverage for their employees under the law.
The provisions are part of the 21st Century Cures Act, a sweeping law that covers the Food and Drug Administration approval process and a number of health initiatives. The legislation was signed into law by President Obama in December.
In the process, the new law creates something known as a qualified small employer health reimbursement arrangement – or QSEHRA – the vehicle through which employers would funnel the reimbursements.
Why is this important?
The IRS in late 2013 issued guidance that prohibited most employers from reimbursing employees who purchased individual coverage on the open market or on an exchange. The IRS reasoned that these types of arrangements violated a number of ACA provisions.
The penalty for violating this guidance is a maximum $36,500 per employee per year, payable in the form of an excise tax.
Obviously, the new law is good news for smaller employers that do not want to pay out for coverage, but still want to offer some assistance to employees.
The new law has a number of provisions:
- Only small employers that are not considered applicable large employers under Code 4980H(c)(2) are permitted to offer a QSEHRA.
- The employer cannot offer a group health plan to any employee.
- Reimbursements are limited to $4,950 for individuals and $10,000 for families. The amounts are indexed to inflation and will increase over time.
- The QSEHRA must be offered on the same terms to all employees, although offers may vary depending on age and the number of eligible family members.
- The employee must purchase minimum essential coverage, as defined by the ACA, and provide proof to the employer.
- The reimbursement will not be subject to income taxes.
- Employers will have to report the reimbursements on W-2 forms.
Employers that want to go this route will need to make some accounting and reporting adjustments to ensure they are in compliance with the new law.
You can talk to us about how such an arrangement could be structured.
The big caveats
Employees that receive reimbursements from their employers would be required to report any such reimbursement to the insurance exchange. And receiving a reimbursement could make them ineligible for government subsidies to help pay for coverage on an exchange.
Even if the employee remains eligible for a subsidy, the amount of the subsidy will be reduced by the amount of funds available under the QSEHRA. This likely limits the attractiveness of a QSEHRA for many employers who might otherwise consider it.
Also, as a result of Donald Trump’s election and Republican control of both houses of Congress, anything concerning the ACA could be subject to change quickly.